What Should Investors Know as Federal Reserve Cut Interest Rate Again

On September 18th, local time, US Federal Reserve cut interest rate by 25 basis points, lowering the target range to between 1.75%-2.00%. Its the second interest rate cut that the Fed made this year, following the last one less than 2 months ago.

Trade frictions and global economic slowdown spurred the rate cut despite a relatively robust US economy. Previously, the ECB (European Central Bank) announced to restart QE (Quantitative Easing) scheme, central banks in UK and Japan decided last Thursday to maintain the current interest rate level, while emerging economies continued to stick to easing monetary policies. Clearly enough, global central banks have entered a new round of quantitative easing which is expected to persist, against a background of increasing down-slope pressure in global economy and gloomy outlook in geopolitical issues.

The August NFP statistics as well as other indicators suggesting an economic downdraft echoed with the observation that the US economy faces “tangible risks”, made by the Federal Reserve Chair Powell in his earlier speech. His speech and the views of several economists all suggested great possibility of another interest rate cut in September. US economist Michael Feroli even predicted that the latest NFP removed the last barrier for Federal Reserve to cut interest rate by 0.25%.

The global market, anticipating the Fed‘s interest rate decision announcement on September 18th, local time in last week, had witnessed dramatic changes. Crude oil price roller-coastered after an attack on Saudi Arabia’s major oil plant; currency shortage on the market on Monday and Tuesday pushed the Fed into repurchase measures again; Peoples Bank of China chose MLF (Midterm Lending Facility) operation and kept a 3.3% interest rate on September 17th quite unexpectedly. The chain of events had put considerable pressure on the Federal Reserve which, already facing both domestic and international challenges, raised global attention in every move regarding interest rate cut and the scale of adjustment.

After the recent decrease of 25 basis point, there had been divided opinions within the Fed about whether a further rate cut should take place this year. The latest Federal Reserve dot plot showed the target rate for 2019, 2020 and 2021 to be 1.875%, 1.875% and 2.125% respectively, while long-term interest rate target is set at 2.5%, in addition to the target rate of 2.375% for 2022. This suggests a plan for no further cuts in 2019 and 2020, and interest rate increases in both 2021 and 2022. Among the 17 Fed officials who participated in the vote, 7 supported another rate cut this year, 5 thought the rate should stay unchanged and 5 considered an interest rate increase is necessary.

As China is the other major global power engaged in the trade war, what measures China‘s central bank will take in this global wave of interest rate cut remains in question. Despite the MLF operation of PBOC on the 17th,the market was still expecting a rate cut and looked forward to the release of LPR rate scheduled on September 20th. A financial analyst from a securities firm in Beijing observed that even if the LPR rate remains unchanged after 20th this month, from long-term perspective there’s still a high probability for lowering MLF rate in 2019, due to the growing stress in macro-economy. Xu Junzhe, the Research Director of Yu Xiu Capital in Shanghai, said that the recent wave of global quantitative easing has created favourable external environment for Chinas currency policies. Overall, China is very likely to continue to pursue a marginal easing monetary policy.

The Feds interest rate slash stirred up the financial market, making the 3 key indices in US stock market plunged and affecting gold and bond prices to various degrees. Forex market, with most of its transactions centering around the USD, is inevitably influenced by these changes. Therefore, investors need to follow closely factors that can affect the fast-changing forex market, understand the market trend and choose the right trading opportunity. WikiFX will follow the latest forex news and make analysis of major events in the News Flash column. Stay tuned as we present you more forex updates.